US industry unites against new taxes aimed to reduce deficit

Thousands of United States airline jobs will be lost if two new proposed government taxes become effective, according to America's airline representative body, the Air Transport Association, which has been joined by other industry groups in opposing new taxes designed to reduce the deficit.

The proposals have galvanised the industry by bringing together unions as well as business aviation pilots and manufacturers with a single message: no new taxes. Passengers are already over taxed, says a beleaguered industry struggling to claw out of the recession and avoid the consequences of a double dip. They rightly suggest aviation is being unfairly burdened not only with the cost of infrastructure and security but, now, reducing the deficit.

A new study by Oliver Wyman estimates 10,000 US airline industry jobs will be lost as airlines try to further reduce costs to cover the tripling of the passenger security fee and a new USD100 departure tax. The Wyman study also concluded that an additional 181,000 jobs could be lost across the economy by reductions in manufacturing, at airports and in supporting businesses.

President Obama has been pushing a new way to evaluate new rules and regulations that determine not only the traditional cost-benefit analysis but the impact on the economy. The industry, however, has beaten the Government to it with its new study from Oliver Wyman.

With limited ability to pass through the cost increases, airlines would be forced to cut 2012 capacity by 2.3% at a time when they are already cutting back as a result of expected softening of demand from a weakening economy. This 2.3% cut will result in 9711 job losses compared with industry employment rates in 2011.

Airlines have developed a new website, www.stopairtaxnow.com, as part of their anti-tax campaign to help visitors tweet and email their objections about the new taxes to Congress. The site also indicates that at a time when businesses are having a difficult time competing on the world stage, the increased taxes will force more cuts to small- and medium-sized cities, effectively separating them off.

The new taxes come at a time when the industry is working to reduce the numerous taxes that are now imposed on passengers and airlines. While the industry points to the fact taxes and fees account for approximately 20% of every ticket, equating to USD61 on a USD300 ticket, it did not universally take the opportunity to lower fares this summer when the authority for collecting them expired for two weeks. Instead they raised fares to match the USD200 million a week that would have been collected, signalling the industry’s true intentions for getting tax relief.

Passenger taxation is now greater than the so-called 'sin taxes' imposed on alcohol, tobacco and firearms that are taxed at 5%, 18.5% and 10%, respectively. The industry’s non-income tax burden is now at USD17 billion compared with the USD3.7 billion in 1995. Security fees and taxes alone amounted to USD3.4 billion in 2010, a 50% increase over 2002.

Passengers currently pay USD2 billion annually for security screening – a charge to which the airlines object. They argue Al Qaeda did not attack airlines on 9/11 but rather the United States, suggesting that any funding to cover terrorism defence should derive from the defence and national security budgets. Even so, given the austerity measures on Capitol Hill this is, unfortunately, unlikely to occur.

Currently, airline passengers pay for just under half of aviation security costs but the government wants to raise this to 75%. The original intent in 2001 was to cover costs by the passenger fee coupled with airline security tax, with the government protesting it has not risen since then. Airlines are not convinced by this assertion, however, pointing to the 50% increase in the amount collected to fund security since 2002.

In addition to this, the TSA has not undergone much scrutiny to ensure its judicious use of the taxes, an issue the airlines want rectified. The General Accountability Office (GAO) has conducted study after study, all concluding the agency has to change. For instance, it says TSA fields equipment before evaluating whether it will get the job done. The GAO pointed to bomb sniffing equipment pieces that were ultimately scrapped. It also charged the baggage machines do not meet current standards for detecting explosives.

Interestingly, the GAO also criticised the agency for spending USD750 million on switching to a behaviour detection system without testing the effectiveness of the programme and whether it justified the cost.

The government has proposed increasing the security fee now paid by passengers from USD10 per each two-segment roundtrip to USD15 by 2017. Compounding this, airlines say, are airport efforts to raise the passenger facility charge from USD2.50 to USD7 per segment or about USD28 per typical two-segment roundtrip.

President Obama wants to raise USD36 billion to pay off part of the USD4 trillion budget deficit over the next decade. About USD15 billion of the new revenue raised from the increased security fee will not go to aviation security, however, but to deficit reduction. In addition, the Department of Homeland Security could raise passenger and airline costs further through regulation.

The industry also notes that other transportation modes are not subject to the same security taxes and fees, again unfairly singling out airline passengers. It is also rightly asking why their passengers are being burdened with reducing the deficit on top of everything else they pay for.

The increase in security fees comes at a time when many – including the White House – are questioning the Department of Homeland Security. Indeed, most want to see sweeping reforms. In fact, the White House has a new petition on its web site asking taxpayers whether or not TSA should be disbanded.

The White House petition, 'Abolish the TSA', and its calls for the use of the TSA's monstrous budget to fund more sophisticated, less intrusive counter-terrorism intelligence, now has over 25,000 signatures, when only 4000 are needed. It has clearly hit a chord with the public. The petition is part of a new White House initiative making it easier for citizens to petition their government.

“The Transportation Security Administration has been one of the largest, most expensive and most visible blunders of the post-9-11 homeland security reformation,” reads the petition. “It has violated countless constitutional rights of average Americans, caused miserable and expensive delays in an already-overburdened air travel system, and allowed multiple known instances of harassment, theft, extortion and sexual abuse by its employees. It has failed approximately 70% of undercover efficacy tests, and for all its excesses, has been unable to catch even a single terrorist since its creation. In our current economic situation, we can no longer afford to continue wasting taxpayer dollars on this Kafkaesque embarrassment. Let us instead invest in saner, more effective solutions.”

The industry knows it is an easy target but is quick to point out that aviation is no longer the preserve of the wealthy as it was in the dawn of aviation. Deregulation democratised it and grew passengers from about 274,000 in 1978 to 720,000 in 2010. They also point to the well-tested equation that for every USD1 increase in fares, there is a corresponding 1% drop in demand. This comes as airlines face dropping demand due to a questionable economy. They have already curbed their fourth quarter and 2012 capacity projections.

The government also wants to impose a new USD100 per departure fee – a fee the industry is calling a departure tax – which is expected to raise USD11 billion over 10 years. It says it is trying to reduce the inequities between what passengers and airlines pay for through taxes compared with business jets through aviation gas taxes. It would go to the Aviation Trust Fund, which has lost a great deal of revenue in the last few years because of recessionary dampening of demand.

This is an argument advanced by the airline industry which is questioned, naturally, by general and business aviation interests who note that airlines use the system far more than business and general aviation and thus should pay accordingly.

Still, the departure tax would mean an additional USD110 million in costs for US Airways and USD140 million for Southwest, according to The Wall Street Journal.

Some of these tax hikes have been tried before and nixed on Capitol Hill. It is new, however, to tap passengers for deficit reduction, which may not bode well with public sentiment.

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